Important things to know by NRIs before taking a home loan in India.

By Abhay Shah, Realty Quarter

The Indian real estate market provides non-resident Indians (NRIs) a profitable investment opportunity. NRIs are also permitted to purchase property in India, through home loans, just like residents of India. But for NRIs and resident Indians, the rules on home loans are not the same. Therefore, key distinctions are essential to understand.

The taxation and foreign exchange regulations should be understood by an NRI, who wishes to buy a property with a home loan in India. We look at the dos and don’ts for NRIs who want to take a home loan in India.

1) NRI, as per the Income Tax Act and FEMA:

Shajai Jacob, CEO, GCC (Middle East), ANAROCK Property Consultants explained: “An Indian who hasn’t been residing in India for 183 days or more and living in a foreign country, is usually known as an NRI.” Experts point out that the Foreign Exchange Management Act (FEMA) will establish whether you are eligible to invest as an ordinary citizen, or as an NRI, while the Income Tax Act establishes the tax obligation relating to such an investment.

2) Requirements for NRI home loan application:

An NRI home loan applicant should fulfill the following requirements:

i) While applying for the loan, an individual should show a minimum of 2 years of work experience of the country where he/she is living.

ii) The maximum tenure for loans is approximately 20 to 30 years.

iii) Usually, up to 60 years are the maximum age permitted to serve home loans.

iv) The loan-to-value (LTV) ratio depends on the age and earnings of the applicant.

3) Rules for repayment of loan and procedure:

An NRI is entitled to pay home loan amount from an overseas bank account using regular banking channels, issue post-dated cheques or an Electronic Clearance Service (ECS), or issue cheques from a local relative’s bank account.

4) Power of Attorney (PoA):

Lenders require a Power of Attorney (PoA) while extending home loans to NRIs, as they live in another country and the lender requires someone to deal with in India.

5) Tax legislation concerning home loans:

i) In India and their nation of residence, NRIs must plan for taxation.

ii) NRIs have to administer changes in foreign currencies since their domestic investment in Indian rupees will take place and their earnings will be in foreign currencies.

iii) The NRIs must remain up-to-date with respect to tax, finance and foreign investment (FEMA) policies related to property purchase.

iv) They must have appropriate means to buy the house, depending on the terms and conditions for home loans.

6) Cost of ownership for NRIs

The cost of ownership is the price to be paid to the Indian seller/developer in Indian Rupees, plus forex loss or profits during the acquisition of such an asset, plus statutory duties payable in India and abroad, plus the capital costs (bank loan interest).

“In case the Indian currency increases above the US Dollar, ownership costs for projects under construction will rise every year. It is best to purchase a ready-to-buy home depending on the necessity, accessibility of capital and loan terms to lock the cost of ownership in Indian rupees.”

7) Home loan from a bank from the NRI’s country of residence:

An NRI may also be able to get a home loan from a bank situated in its residing country that also has a branch in India. This alternative needs to be examined widely. Since debt costs in most nations outside India are generally lower, foreign banks can supply loans without worrying about foreign currency, through their respective interactions and branches in India. Currency fluctuation risks will occur to NRIs purchasing a house with a loan in India. They should, therefore, explore ways to address the danger of currency fluctuation, to prevent the expense of the loan escalation.